Congratulations if you are among the millions of U.S. homeowners with a share of the record-breaking $11.5 trillion in tappable home equity these days! To unlock that wealth, which nine out of every 10 mortgage holders hold to some degree, you might well be tempted to take out a home equity loan or home equity line of credit (HELOC). A way to borrow against your equity stake, these tools can provide funds to eliminate high-interest debts, pay for home renovations, or tackle other significant expenses.
Before you start counting the coins in your housing piggy bank, though, a reality check: Getting approved for a HELOC or home equity loan isn’t easy. Roughly half of the applications get rejected — far more than the rate of primary mortgage denials.
If you are denied, here are six things you can do about it — along with ways to boost your chances of getting approved.
53%
The denial rate on HELOC applications in the first quarter of 2024
Source:
Home Mortgage Disclosure Act
Understand why you were denied
First things first: Find out why your application was denied.
“Lenders will share the reason very specifically, but you may have to ask,” says Tom Hutchens, executive vice president at Angel Oak Mortgage Solutions, a non-qualified mortgage lender based in Atlanta, GA. “Find out the reason and if it seems like there’s a way to get over that hurdle, then continue on.”
Frequently, it is tougher to get a second mortgage than a primary mortgage. While HELOC rejection rates are the lowest in four years, about half of applications are still denied, for example. Successful applicants tend to have high credit scores and low levels of debt, including relatively small outstanding mortgage balances (less than half their home’s value).
Why is it so hard to borrow against your home’s equity? Lenders are more stringent for good reasons. In the first place, they can’t sell home equity loans on the secondary market as readily as they can purchase (primary) mortgages: They have to keep them on their books. Then, in the event of a borrower default, the lender is second in line to recover their funds, behind the primary mortgage lender. So they’re taking on more risk by giving you money.
What do you need for a home equity loan?
What do lenders consider when evaluating HELOC and HELoan applications? Typically, they look for a strong credit score and solid financials like low debt levels, especially if you already have a mortgage. Here are some of the typical minimum requirements:
| Credit score | Minimum score of 640 or higher |
| Ownership stake | At least 15-20% equity in the home |
| Debt-to-income ratio | Below 43 percent |
| Combined loan-to-value ratio | No more than 80 percent |
| Income | No set level, but you will need to demonstrate stable, sufficient income to handle all obligations |
What to do if you’re denied a HELOC or home equity loan
Now that you know what lenders are looking for, let’s get your financial house in order.
Increase your home equity stake
Lenders calculate how much to let you borrow by calculating your combined loan-to-value ratio (CLTV). This ratio compares the total amount of loans secured by your property to its appraised value, and it includes both your mortgage amount and the amount of the loan or credit line you’re requesting. Generally, lenders prefer a CLTV of no more than 80 percent to minimize their risk. In other words, they’ll only lend you up to 80 percent of your home’s worth.
If you’re already carrying a sizable mortgage, this could be a problem. “Once an appraisal [in the home] is done, they might find that there’s not enough equity left to get a HELOC while keeping the CLTV at 80 percent,” Hutchens explains. He notes that some homeowners might face challenges if they made a small down payment, have not paid off much of their mortgage, or if their property hasn’t appreciated much.
“If there is not enough equity in the home, that would be a hard one to fix,” Hutchens allows. If the appraisal is the problem, you can request a second one from another appraiser, or a re-do by the first. For the latter, you’ll need to pinpoint some actual errors in the report, though — like a miscalculation of the home’s square footage or facilities, or inappropriate comps (comparable homes that have recently sold).
Otherwise, if your ownership stake is falling short, you should hit pause on your plans and work on building your equity. You can do this by paying down your mortgage faster with extra payments or making home improvements to boost your home’s value (assuming you can afford to).
Adjust your ask
If your equity stake is insufficient for the amount of funds you want, attack the problem from the opposite angle: Adjust the size of your loan request. Consider asking for a smaller loan or credit line — one that’ll fit the CLTV limits the lender sets. You could also accept a higher annual percentage rate (APR). By being flexible with these terms, you may reduce the perceived risk for the lender, potentially making it easier for them to approve your application.
49%
Percentage of mortgaged residential properties in Q1 2024 that are “equity rich”: Their outstanding loan balances are no more than half their estimated market values
Source:
ATTOM
Boost your credit score
If your credit score is 700 or above, you’re in a good position to get approved for a HELOC or HELoan. In fact, the average score for people who got HELOCs in the first quarter of 2024 was 770, according to Home Mortgage Disclosure Act data.
“Surprisingly, many folks are not as aware of their credit score as they probably should be,” says Ralph Herrera, Realtor and senior real estate advisor at Engel & Völkers Atlanta, a real estate service provider based in Georgia. “Folks don’t pay attention to that until maybe it’s too late. A little bit of planning in advance is helpful to prepare.”
If your credit score was the reason for denial, start by reviewing your credit report for any errors that could be affecting your score. Dispute any inaccuracies with the credit bureaus. Additionally, enhance your chances of approval by paying down your debt, making payments on time, and steering clear of opening new credit accounts.
Reduce your debt-to-income ratio
When applying for a home equity loan, lenders check your debt-to-income ratio (DTI) to ensure you can comfortably handle the extra obligation. DTI is the percentage of your monthly income that goes toward paying your regular, monthly debts.
A high DTI can be a significant obstacle in getting approved for a HELOC and a HELoan. Most home equity lenders look for a DTI ratio no greater than 43 percent, and the median DTI of a HELOC borrower was 41 percent in Q1 2024 according to HMDA data. “With property values being high, if someone bought a house within the last couple of years and their interest rate is higher than those prior to that, then borrowers are running into some DTI challenges,” says Hutchens. (Indeed, the median HELOC borrower’s DTI was only 32 percent in Q1 2021.)
To improve your chances of approval, work on reducing your existing debt by paying off high-interest loans and credit cards. Increasing your income through extra work or negotiating raises are other ways to lower your DTI.
Reapply with a different lender
If one lender turns you down for a HELOC or HELoan, don’t worry. Try applying with a different lender, as each has its own criteria and risk tolerance. You could always seek out a lender who allows a bigger CLTV (say, 85 or 90 percent).
“There are lots of different loan programs and lots of different HELOCs out there,” says Hutchens. “Actually, they’re very highly sought after right now. There’s liquidity in the market, meaning lots of investors are interested in owning HELOCs.”
If you are considering reapplying with the same lender, remember to wait a while before submitting a new request. The wait period varies by lender, but you’ll want it to be at least a month and maybe up to six months, depending on the reasons for the denial. The longer the better — if you’ve used the time to improve your financial profile, credit score or employment history.
Consider alternative financing options
Improving your finances takes time. If you’re in a hurry, it might be better to consider alternatives to home equity products. Common ones include:
- Personal loans are unsecured, meaning you don’t have to use your home as collateral. They often have higher interest rates and shorter repayment terms, but they can be quicker and easier to obtain than home equity options.
- Credit cards can be another option for minor expenses. However, the high interest rates make them less suitable for large sums unless you can pay off the balance quickly.
- A shared equity agreement, which is more of an investment than a loan. You receive a lump sum of cash immediately and agree to share a portion of your home’s sale profits or its appreciated value later.
- Loans from friends or family can often be more flexible and cost-effective. However, make sure you set clear repayment terms from the beginning to prevent misunderstandings and potential strains on your relationships.
Bottom line on home equity loan denials
If you’ve been turned down for a home equity loan, don’t worry: It’s not the end of the road. Start by closely examining your application to figure out why it was denied. Once you know the reasons, you can improve those areas and reapply.
Also, consider other options that don’t involve putting your home at risk. Personal loans or credit cards might be viable alternatives. Each has its own pros and cons, so take your time to weigh them and find out what works for you.
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